With bank interest rates near zero, it makes zero sense to park money, other than the emergency fund, in savings or money market accounts. On the other hand, with the rate on 30-year mortgages recently hitting all-time lows below 3%, refinancing into a 15 year mortgage or lowering payments on the 30 year are wise choices. In either case, the key is to figure out where to put the money so that it yields better returns than the bank rate or the mortgage rate.
In the current market, the obvious choice is to invest in high flying Technology stocks. But, many already have significant exposure to the FAANG group ( Facebook, Amazon, Apple, Netflix and Google). Both the S&P 500 and the Nasdaq are heavily tilted toward these stocks. And so, looking at other sectors that provide much needed diversification and provide good returns would be the judicious choice.
Future Wealth’s View
The three choices that come to mind are High Dividend Stocks, REITs and Corporate Bonds. With the economy tanking and 10 year treasury yields at less than 1%, these groups offer much better returns while avoiding piling onto the same technology names.
High Dividend Stocks, especially, the large cap names like Exxon, AT&T etc. offer yields of ~5% and despite the recession, these stocks tend to hold their dividends steady. As such, the risk of a dividend cut is minimal. Furthermore, these companies have been hoarding cash which also offers the investor the opportunity for higher dividends once the economy returns to normality.
REITs or Real Estate Investment Trusts are another interest rate sensitive segment that pays out 70-90% on its earnings. However, the risk in REITs is that shelter at home has put a dent in commercial real estate for office space. And, malls are going empty but, there is a silver lining – many of the mall spaces are being swapped as warehouses for the likes of Amazon.
Corporate Bonds have the advantage that interest rates are likely to remain near zero for at least the next 2-3 years and as such, the risk of bonds losing value from higher interest rates is largely a non-issue. In the meantime, with the Fed buying corporate bonds, there is little risk to the 3-5% yield.
Instead of yearning for the next hot Tesla or Covid stock and becoming a victim to the greater fool theory, we, at Future Wealth LLC, are loading up on these three sectors for our clients. So should you.